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Investing January 25, 2016
DOL Sues Sponsor Over Company Stock Valuation
The DOL is asking a Florida district court to take action against an employer accused of inflating its fair market value during an employee stock ownership plan transaction.
Reported by John Manganaro
A new lawsuit filed by the Department of Labor seeks to recover losses suffered by participants in an employee stock ownership plan (ESOP) due to alleged overvaluation of the company stock.
The employer in question is Commodity Control Company, based in Miami, Florida, and co-owned by David and William Pilger. The pair were also trustees of an employee stock ownership plan (ESOP) established by the company under the Employee Retirement Income Security Act (ERISA). According to an investigation by the DOL’s Employee Benefits Security Administration (EBSA), the defendants “acted with imprudence, disloyalty, and contrary to plan documents; and engaged in prohibited transactions in violation of ERISA. Specifically, they caused the ESOP to purchase employer common stock for greater than fair market value.”
According to EBSA, early in 2009, the Pilger brothers caused the ESOP “to buy their entire ownership interest in the company for $9.1 million, thereby causing the ESOP to acquire 100% of the company.”
The complaint alleges that the ESOP “overpaid for the company stock” as a result of the defendants’ failure to obtain an accurate and current appraisal of the company stock. Defendants are also accused of “failing to ensure that the independent appraiser of the company stock had accurate and complete financial information; perform a review of the valuation reports prepared by an independent appraiser; and not questioning assumptions underlying the valuation reports.”
The complaint also alleges that the defendants violated ERISA when they “caused the promissory notes issued by the ESOP to David and William Pilger to include default provisions that were contrary to the ESOP document.” In particular, the ESOP document “limited recovery to the amount of the default; however, the promissory notes required the ESOP to immediately repay the notes and pay the cost of collection and attorney fees in the event of default.”
Taking it all together, the DOL is asking the U.S. District Court for the Southern District of Florida, Miami Division, to “require the defendants to jointly and severally restore losses caused to the ESOP as a result of their fiduciary breaches; to require David and William Pilger to disgorge any cash, payments or proceeds that they received for any of the ESOP stock purchases; and to permanently enjoin all defendants from serving as fiduciaries or service providers to ERISA plans in the future.”
The full text of the complaint is here.